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BHP profits slump, sees global slowdown

PERTH (miningweekly.com) - Global miner BHP Billiton has reported a 6% decline in attributable profit for the first half of 2012, with profit falling to $9.9-billion, from $10.5-billion in the previous corresponding period.

CEO Marius Kloppers said on Wednesday that the first half of the 2012 financial year posed challenges in terms of global economic growth reflecting the continued difficulties in Europe, and the slowing levels of activity in the high growth economies of China and India.

Despite the decline in profits, the earnings before interest, tax, depreciation and amortisation increased by 8%, to $18.7-billion, while the group’s underlying earnings before interest and tax margin remained in excess of 40%, despite the significant volatility across the company’s core markets.

Record production at BHP’s Western Australian iron-ore operations, and stronger bulk commodity and petroleum product prices were the major catalysts for the 6% increase in the underlying earnings before interest and tax, said Kloppers.

However, he noted that a series of operational challenges constrained margins across the broader portfolio as the temporary reduction in production at the Escondida copper operation, in Chile, and the Queensland coal operations, in Australia, further exacerbated underlying cost pressures.

Kloppers noted that prices for several of BHP’s products also declined in the latter part of 2011, as concerns surrounding broader European liquidity culminated in a general deterioration in commodities demand.

“We expect volatility in commodity markets to persist as the European sovereign debt crisis and general weakness in the manufacturing and construction sectors across key markets are expected to weigh on customer behaviour and sentiment,” he added.

“However, we expect underlying demand growth rates to remain robust as long as the macroeconomic policy setting of the developing world retains a growth bias.”

Kloppers noted that of the commodities, copper and iron-ore were expected to remain supported by their compelling supply-demand fundamentals, while the structural shift in Chinese demand for metallurgical coal would remain well entrenched.

In contrast, the outlook for the aluminium, nickel and manganese alloy industries remained challenging and had led to significant margin compression for most producers, said Kloppers.

“In the longer term, we expect the rate of growth in steelmaking raw materials demand, particularly in China, to decelerate as underlying economic growth rates revert to a ore sustainable level,” he added.

Slowing activity in the steel-intensive construction and infrastructure sectors was, however, expected to be partially offset by robust growth in consumption related to sectors such as machinery and transportation, thereby supporting the fundamentals for iron-ore and metallurgical coal.

Kloppers noted that more broadly, higher cost sources of new supply would be required in an expanding market, which in turn were expected to support long run margins for the incumbent low cost producers, such as BHP.

Despite the volatile outlook, BHP has remained focused on its plans to spend some $27-billion on its growth projects as part of a massive $80-billion spending plan over the five years to 2015.

Kloppers noted that the company would intensify its flexibility within its investment pipeline and would focus on businesses where a sustainable competitive advantage existed, and superior investment returns could be generated.